Mid-America Apartment Communities, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. MAA operates as an UPREIT through Mid-America Apartments, L.P. At quarter-end, the company owned and operated 256 communities with 80,300 apartments in 15 states, and had four development communities totaling 628 units under construction.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $272.2m | $258.9m | $541.3m | $517.4m |
| Net income available to MAA common shareholders | $45.1m | $136.3m | $88.6m | $197.6m |
| Diluted earnings per share | $0.60 | $1.81 | $1.17 | $2.62 |
| FFO attributable to the company (non-GAAP) | $122.6m | $112.4m | $241.9m | $219.3m |
| Core FFO attributable to the company (non-GAAP) | $118.8m | $108.0m | $233.3m | $213.2m |
- Revenue increased 5.2% in Q2 and 4.6% year to date. Same-store revenue rose 4.4% and 4.9%, respectively; same-store NOI rose 7.1% in Q2 and 6.8% year to date. Q2 same-store NOI margin was approximately 61.3%, versus 61.1% in 2015, calculated from reported same-store revenue and NOI.
- GAAP net income fell substantially because real estate sale gains were much lower: Q2 gains on depreciable property sales were $0.1m versus $105.2m; six-month gains were $0.8m versus $135.4m. In contrast, FFO and Core FFO increased, reflecting property revenue growth.
- Q2 average effective rent per unit increased 4.4% year over year. Physical occupancy was 96.6% at quarter-end, excluding development and lease-up properties; quarterly average same-store occupancy was 96.2%.
- Operating cash flow for the first six months was $238.2m, compared with $226.5m. Investing used $185.4m versus $29.2m, primarily reflecting much lower disposition proceeds ($38.0m versus $238.8m). Financing used $64.1m versus $194.0m, including $105.0m of net credit-line borrowing. Cash and cash equivalents were $26.3m at June 30, down from $37.6m at year-end.
- Total assets were $6.87bn. Debt was $3.49bn ($2.25bn unsecured and $1.24bn secured), with a 3.7% weighted-average interest rate. Approximately 92.9% of debt was fixed or capped after derivatives; the company reported debt at 29.2% of total capitalization. The $750m unsecured revolver had $180m drawn and approximately $2.8m supporting letters of credit.
- Dividends declared were $0.82 per share in Q2 and $1.64 per share for the six months, up from $0.77 and $1.54, respectively, in 2015.
Material changes, outlook, risks and unusual items
- Management attributed same-store revenue growth mainly to higher effective rents. Same-store property expenses increased 2.3% in Q2 and 2.6% year to date; real estate taxes were a major contributor.
- Management described apartment demand as strong and said current occupancy positioned the company to maximize pricing during the typically strong summer leasing season and in Q3 2016. This is commentary, not formal earnings guidance.
- Management noted multifamily permitting was down approximately 10% year over year through May 2016, but expected prior supply growth to increase competition over time; it believed demand and supply would remain broadly balanced in most markets.
- Development projects had expected total costs of $96.9m, of which $49.4m had been incurred. Management expected one completion in Q3 2016, two in Q2 2017 and one in Q4 2017.
- Interest-rate exposure, financing and refinancing conditions, property-market demand and supply, development costs and timing, operating-cost inflation, insurance and catastrophe losses, and REIT tax compliance are among the disclosed risks. The filing states there were no material changes to previously reported risk factors.
- A construction-deficiency litigation matter was settled and court-approved in April 2016. Aggregate loss-contingency accruals were $9.9m at June 30, versus $13.5m at December 31, 2015; management said other ordinary-course matters were not expected to have a material adverse effect.
- Management stated it believed resources were adequate for operations, property refurbishment and incremental investment. It cautioned that significant deterioration in operations could require a dividend reduction. The filing reported no material change in market risk and no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess recurring property performance using same-store revenue, NOI, occupancy and rent growth separately from gains on property sales that materially affected 2015 GAAP comparisons.
- Review the maturity schedule, variable-rate exposure, derivative positions and refinancing needs; $155.8m of debt principal was scheduled for 2016 and $157.9m for 2017.
- Track development spending against the $96.9m expected cost and the stated completion schedule, as well as acquisition and disposition activity.
- Compare operating cash generation with capital spending and distributions, and monitor liquidity and dividend coverage.
- Consider that FFO and Core FFO are non-GAAP measures and may not be comparable with similarly named measures reported by other REITs.